Welcome to the Q3 2016 Stora Enso earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead.
Okay. Thank you. Good afternoon, everybody. It's Ulla here. Why don't we start? I will hand over now to Kalle. Please go ahead, Kalle.
Good morning, good afternoon, depending on where you are in the world. I would like to go through a presentation together with Seppo, and then open it up for Q&As. Another quarter of solid performance. Sales reach almost EUR 2.4 billion in the third quarter of 2016. Importantly here is that we are continuing to grow. We grow by 1.8 percentage points, excluding structural decline in paper and divested Barcelona mill. The ramp-up of Varkaus and Beihai is continuing, and is going well. We are reporting an operational EBIT of EUR 219 million. Included in that is an additional loss of EUR 35 million due to the Beihai ramp-up. Cash flow of EUR 390 million.
Year to date, we are EUR 70 million ahead of last year in generating cash flow. We are reporting a return on capital employed of slightly more than 10%. Excluding Beihai, we are at 13.5%. We managed in this quarter actually to reduce the net debt to EBITDA down from 2.5 times last year to 2.1 times. I think this is a very important part of our delevering story. If you take the next slide. If you have a look on the operation. We had last year a EUR 246 million or 9.8% EBIT margin. In this quarter, because of the additional costs of ramping up Beihai of EUR 35 million, we actually are having a minus 13% for the Consumer Board. Packaging Solutions, basically due to the better and the break-even performance of Varkaus, improved by 3%.
You have Biomaterials being affected slightly by lower volumes, but basically by lower hardwood pulp prices. You have a stable Wood Products, and you have a huge improvement in paper. You're having slightly less than last year in other, and that is basically because in this quarter, in next quarter, we will have a lot of less land sales compared to the year-ago period. That ended us up at 9.2%. If you put back to understand the underlying profit generation of Stora Enso, you put back the 35 and deduct the 7 for the paper asset disposal that was done in quarter. We ended up actually with the underlying EBIT margin of 10.4%.
We have now stabilized for the fifth quarter in a row, a return on capital employed above 10%, and for the fourth quarter in a row or in a short period, we are actually above 13% if you exclude Beihai. The delevering of Stora Enso continues. We've been well over 3 in 2013, and due to the improved profitability, been able to reduce the net debt to EBITDA, where we are today at 2.1 times versus 2.5 times a year ago. The transformation steps since 2015 is a long list.
From the newly inaugurated sawmill in Murów, the biorefinery, the Beihai board mill that we started up in May, the Virdia demonstration plants, the Oulu sawmill, boiler and pellets investments, and now the recently announced restructuring of the corrugated business in the Nordics has happened since 2015. We have done a number of divestments and closures announcements since then, and the latest one is actually the closure of the box plant in Heinola. The transformation. Beihai board mill is ramping up ahead of plan. Prime quality reached. We are running customer tests with liquid boards, and they are proceeding extremely well. The first CKB board test runs are completed. We expect full production in 18-24 months from the startup in late May 2016.
The BCTMP plant is planned to be operational before the end of this year, and that will give a 220,000 tons capacity of BCTMP. The chemical pulp, the 130,000 of hardwood we source from Veracel and 90,000 tons softwood from the market. The PE coating investment is expected to be completed in mid-2017. Varkaus kraftliner ramp-up is proceeding. We reached, as expected, break even in Q3. Full production is expected during the second half of 2017. We will have maintenance in Q4 this year, and we will do some additional CapEx investments during Q1, where we need to take the mill down. The new production line for wood and building components, LVL, is ramping up, and we are right into the certification process. Full production expected in mid-2018.
Before I hand over to Seppo, I just want to make sure that the transformation continues. This is a slide that I've been using for the last couple of quarters or more than that. From going from having less than one-third of growth business, we are now over two-thirds of growth business when it comes to sales. Actually, when it comes to being just below 40% of the profit, we are now over three-quarters of the profit coming from the growth business. With that one, I hand over to Seppo.
Thank you, Kalle. I start with some key figures. First of all, sales. Reported sales was down 4.3%, but worth to notice, as Kalle already mentioned, that there's good underlying growth in our business excluding divestments and declining paper business, and that was going up 1.8% in Q3 year-on-year. Operational EBITDA margin was 13.6%, slightly down compared to a year ago, and operational EBIT margin was 9.2%. Earnings per share, excluding items affecting comparability, was up EUR 0.04 and was EUR 0.0017 in total. Operational return on capital employed, excluding Beihai project, was 13.5%, so it was above our strategic target of 13% and also up compared to a year ago when it was 13.1%. Net debt to last 12-months operational EBITDA was 2.1, clearly down from 2.5 a year ago.
I move to our divisions and start with Consumer Board, where sales growth was 3.2% excluding the divested Barcelona mill that we divested earlier. Operational EBIT increased EUR 20 million or 23.3%, excluding the Beihai operations. That was thanks to increased efficiency and improved product mix. Operational return on capital was 12.9%. Very good achievement, excluding Beihai Mill, we reached 42.3% return on capital. You have to remember, Beihai Mill, as it is in the startup phase, it is creating some operational losses to us. EBIT loss in Beihai was EUR 42 million in Q3, and we expect about EUR 33 million in Q4. We have also announced a new investment at Imatra Mill, and we are investing EUR 14 million there to renew and modernize malodorous gas processing.
We also launched a new product, CKB Nude, that is uncoated carton board designed to meet the consumer preferences with natural look and feel. Moving to Packaging Solutions. The sales were 15% up, driven by Varkaus kraftliner mill and also higher volumes from our Polish container board mill in Ostrołęka. Operational EBIT was EUR 3 million up and input result of Varkaus mill was partly offset by the challenges we are having still at Stora Enso Inpac in China. We also reached important milestone in Varkaus. Varkaus kraftliner mill, the ramp-up is proceeding, and we had the first positive EBITDA quarter in Q3. We also announced plans to consolidate corrugated packaging production in Finland to Lahti plant, and negotiations locally are going on as we talk. Moving to Biomaterials.
Sales decreased due to lower hardwood pulp selling prices and slightly lower volumes, and that was mainly due to maintenance. The reason is that Veracel had annual maintenance now this year during Q3, while a year ago it was the quarter before, meaning Q2 2015. That also had some effect on the EBIT for the quarter. Also meant that deliveries were slightly lower. The main driver for the EBIT development was significantly lower hardwood pulp prices. Also good news is that customer trials for Lineo are proceeding well at the Sunila Mill, and we are also going ahead with R&D ramp-up during the coming quarter. Wood Products. Their sales increased. That was mainly due to higher volumes from Murów Sawmill in Poland, and also Varkaus LVL plant is ramping up since the start in June earlier this year.
Operational EBIT was stable, positively affected by lower log costs and higher sales volumes, but negatively by higher fixed costs and lower income from sawdust and wood chips. LVL, wooden building components plant ramp-up is going ahead as planned, and we are moving ahead at the moment with the certifications. Operational return on capital continued stable at 17.5%, only a little bit short of our target of 18%. Moving to Paper. The operational EBITDA improved 75% year-over-year for the quarter. Stable prices and stable volumes in a declining market. Important to note is that actually sales remained flat excluding the structural changes. Like I said, EBITDA increased some 75%. That is thanks to tight cost management and good production efficiencies in Paper division. Low variable cost, especially in energy, wood, chemicals and pulp, and lower fixed costs.
Like Kalle was referring to also earlier, there was about EUR 7 million positive included for asset disposals in the result. Cash flow generation continued at an excellent level, I dare to say. Cash flow after investing activities to sales was record high at 11.7% and clearly above the long-term target of 7% that we have set for the division. Divestment of Kabel Mill in Germany was completed, and Suzhou Mill divestment is proceeding according to the plan as announced earlier. We also continue our internal project in Paper, as we have announced earlier that we are reviewing how to create the best conditions for the Paper division to compete under the increasing cost pressures and declining market demand. To summarize the strategic targets. As you can see, we have quite many green ticks there already.
First of all, on the growth, we are growing to 1.8% now, a bit less than a year ago, but thanks to ramp-ups that are in the pipeline at the moment, Beihai, Varkaus, we are confident that the positive trend will continue there also. Balance sheet has strengthened, as commented earlier. Net operating EBITDA clearly below the targeted level, and debt to equity as well at 52%. Operating return on capital excluding Beihai at 13.5%, including Beihai, 10.1%. This goes to sales at 25.5%, so still above our targeted 20% level, but we are still confident that in the longer run we will be able to reach the targeted 20% level. Look at the divisions. Consumer Board, where the target is 20%, they were at 12.9% in Q3 this year, including Beihai and excluding Beihai at the excellent level of 42.3%.
Packaging Solutions at 9.6%, still suffering from the effects of Varkaus startup and Inpac in China. Biomaterials 6.7%, result affected by the latest trends with the pulp prices, Wood Products at 17.5%. They have been at or around the 18% target level already for some time and stable performance continues. Paper, like I said earlier, at 11.7%, cash flow after investing activities, where the target is to be above 7%, so clearly above that. Also a year ago, we were at 9.2% above the targeted 7% level. Over to you, Kalle, on guidance.
Thank you, Seppo. The guidance for the fourth quarter 2016 is compared to the third quarter 2016. Sales are estimated to be slightly higher or slightly lower than the amount of EUR 2,393 million recorded in the third quarter of 2016. Operationally, it is expected to be in line with or somewhat lower than the EUR 219 million recorded in the third quarter of 2016. These estimates include a positive impact of the scheduled annual maintenance shutdowns of approximately EUR 35 million compared to the third quarter of 2016. It is important to remember that in Q4, we'll have a normal seasonal slowdown for Consumer Board will affect profitability negative as usual. Transformation into a customer-focused renewable materials company is progressing well. The Beihai Consumer Board is ramping up ahead of plan. Customer test on liquid board ongoing. Test run for CKB completed.
Varkaus kraftliner and mill reach EBITDA break even. A center of excellence for corrugated packaging in Lahti under consideration. Wooden building, Australia's first wooden office building from Stora Enso CLT is being constructed as we speak. We inaugurated the Murów sawmill in Poland during the quarter, we launched CKB Nude. I hand over to Ulla.
Thank you, Kalle. We are now ready for the Q&A session. Please give instructions.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Mikael Jafs from Kepler Cheuvreux. Your line is open. Please go ahead.
Yes, hello. Good afternoon, everybody. I have a couple of questions. As we can see, your balance sheet is strengthening, and as you point out, your net debt to EBITDA is running at 2.1 times. This cash flow is really strong. Really, I have two questions around this. What is, in your opinion, an optimal balance sheet going forward? Secondly, should we somehow link this good cash flow and debt reduction into our thinking around the dividend? Of course, we all know that it's the board that decides upon that. That would be my first question. Then second question, on the paper, the projects that you launched, and you're saying that it is running on plan, could you just give us some more color and flavor around that project on competing better in the paper division? Thank you.
First of all, I think having a net debt to EBITDA that starts with a one would be probably very good for us. As you say, it is a increased cash generation, which we have been able to do, both because we have continuously taken out working capital, as well as we are having lower investment this year than we have the year before. We have given this that over a longer period, we want to take the investments, the CapEx, down towards somewhere around the depreciation rate plus EUR 100 million for the biological assets that you need to replant on the plantations. Obviously, this is something that the board are looking into, and that's a discussion that starts basically now. I think I answered that question there without answering it really, because I feel very positive about our cash generation capabilities.
Thank you.
When it comes to best-in-class paper, I think the performance today is basically our ability to run basic. If you take away the sold or the closed assets, we've been running stable volumes and stable prices. To be able to keep this up, we are working on this best-in-class paper, and probably have helped a little bit this quarter, but it's actually all about how we make our paper business more competitive in a challenging market, and it's progressing well.
Okay. Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Your line is open. Please go ahead.
Thank you. Just want to start with Beihai. Are you producing any commercially viable products today, or is that still something to come? How do you see your production mix developing in 2017? If you can provide any color, how do you see the progression of earnings? Obviously, you said you had, what, EUR 42 million EBIT loss and then EUR 33. Is that the pace we should expect over the next two, three quarters, a continuation of gradual improvement at that pace? Another question, I guess, on Consumer Board. There are some challenges in Europe in terms of weak-ish demand and significant capacity additions. Well known, of course, but how do you see this business going forward in Europe in terms of demand trends and the amount of supply that is available now from European side?
First of all, we have been selling some qualities, but it's basically second-grade folding boxboard in China, and that's part of the reason why it's part of the growth in Consumer Board. The more important is the qualifications that we are undergoing with the big customers when it comes to liquid packaging. They are going well, better than expected. Then we are also, as I said, had completed the tests with very positive results on CKB. Then we are also doing some specialized noodle boards for noodles. In the medium term, we will start with some better folding boxboards, then we will work with other grades like cigarettes and also some cupboards, but towards the Chinese market. The end game of this mill is to run it basically on food service board, CKB, and liquid packaging.
That we will get some volumes of liquid already next year, but that's towards the end of the year. Then the other areas, it's a little bit more around how fast we can ramp it up and get customer qualification on some of the more advanced boards. I'm sorry that I can't give you a longer plan, but the mill has been running four months, and we have already done quite a bit when it comes to the qualifications. I'm very proud of the team, and they are ahead of the timeline. I know this is complicated, and we know that from history, and we know that from some of the challenges our competitors has been having. If your question was about Consumer Board in Europe-
Yes.
Yes, I think that we see a slow growth in Europe, depending on where in Europe you are. Central Europe is probably 1 to 2 percentage points or 1%, then more on the eastern side, we see slightly higher. Then we see strong growth in China and in Southeast Asia. Over time, we will deliver the over 100,000 tons that we are selling into the Chinese market right now into new markets, and that will probably be Middle East, it will be certain parts of Europe, and that's what we are working on. I think the demand for liquid is quite healthy, but it's stronger in Asia, that's why we are building Beihai.
In terms of starting up the BCTMP plant, should we expect any cost associated with that? Where do you see the benefit for those operations as you ramp that up?
I think when it comes to the BCTMP, that is included in the EUR 33 million that we are giving as an EBIT impact for the Q4. Obviously it will need some qualifications because we are now buying external CTMP pulp. That will be in one of the loops going ahead on certain grades.
Understood. Final question from me. Given the significant price spread between European kraftliner today and U.S., would you consider to try to move some volumes from Varkaus into the U.S. market?
A lot of the volumes of the Varkaus, we are already deploying in Latin America, and very close to the U.S. in north part of Latin America. I think we have had some looks on the U.S. market, but we have been picking Latin America, we're picking Middle East, and we've been picking Southeast Asia.
Can you give us any quantum about how much you are exporting from Varkaus versus domestic in Europe, just to get some bearings?
I don't have that in my head, but it's significant amounts.
Yes. Okay, thank you.
We will now take our next question from Harri Taittonen from Nordea. Your line is open. Please go ahead.
Yes, thank you. Harri Taittonen for the Nordea. Good afternoon. A lot of the questions I had in mind have been answered already, but maybe one on the variable costs and the deflation cycle we have seen over the last couple of years. Are you seeing any impact of variable costs starting to move up with the oil price and recycled fiber prices as those costs or the unit prices seem to have been increasing over the past months? How much of that impact have you seen and will there be more of that in the coming quarters?
Well, Seppo here. The effect has been very limited of the high energy prices. You have to remember that of course, when it comes to electricity, for instance, we are hedged pretty much, and we have our shareholding in PVO where we get it at cost anyway. When it comes to logistics and others, there has been some positive effect from energy, also from the wood and other places. I would say that the cost pressures have remained quite small or non-existent, and we don't feel any immediate pressures either at the moment going forward.
Okay. Maybe just one more on the paper business review. By the sound of when you communicated it and looking at possibly building separate HR, IT structures, is there going to be extra cost related to the separation, which then needs to be offset by the benefits you are seeing from the review? How do you look at the cost implications from the review?
It might be some initial extra cost, they will of course be offset by a bigger saving in how we run it. Net is going to be lower.
Yeah, makes sense. Okay.
Yes. I just want to be very clear about that.
Yes. Thank you very much.
We will now take our next question from Justin Jordan. Your line is open. Please go ahead.
Thank you. Good afternoon, everyone. Firstly, I just wanted to return to Packaging Solutions. In prior quarters, you've given us the actual tonnage volume produced from Varkaus in Q1 and Q2. Can you provide the similar number for Q3? Secondly, staying within Packaging Solutions, you've talked in the past about expanding the Ostrołęka mill in Poland with additional test on their production. Given what's going on in terms of increased OCC prices across Europe, is that decision now on hold, or can you give us some timeline as to potentially a decision for that?
I ask the second, the last question for you, and then I ask Seppo for help on the Varkaus. When it comes to the potential of a PM6 in Ostrołęka, that pre-study is underway. We are well aware of what you are mentioning, and once that study is ready, we will take a decision. There's no change.
Can you give us some timeline for that study, please?
By the end of the year, as previously announced.
Okay, fine.
I'm still checking the Varkaus volume, if we continue.
Yeah
I come back to that shortly.
Yeah. Okay. Just on going back to page 17 of your slide deck, where you talk about strategic targets across the various divisions. Given what's happened with pulp prices within Biomaterials, you have an operational return on capital target of 15%. Is that now unrealistic given current pulp prices, or is there any operational improvements that you can bring to the Stora Enso asset portfolio to make that achievable again?
If you look at the pulp prices today, and the performance in the third quarter, you have to remember that Veracel was in maintenance-
Yeah
In Q3, which is huge. That's affecting. To get to 15 with the present pulp prices, it's a bit of a stretch. We were around 15 last year when the pulp prices were in a different level. Obviously we need to work on it, but it's not done overnight. The target of 15, which is a longer-term target, remains. Right now we are suffering from especially low hardwood prices.
Coming back to your question on Varkaus volumes. In Q3, it was 69,000 tons, which is 65,000 tons more than a year ago. For comparison, in Q1 it was 60,000, Q2 67,000 tons, slightly progressing upwards as it should be.
Fantastic. Thank you. Just one final question. I appreciate you've been asked about it several times, just on the paper division review. Should we be expecting something with your November 17th capital markets day, or is this something that you might share with us, the review findings with the Q4 results? When should we expect some conclusions from this?
First of all, it's an ongoing process because we are working with it, and as I said, part of it is included in the quite strong performance versus a year ago. It's going to take longer time because this is a project actually that we are designing and redesigning as we go, because we really need to find a structure that supports a very competitive paper business. Don't expect too much from the capital markets day, to be honest.
It's more like continuous improvement type of thing and project running.
In this regard, yes.
Okay. Thank you.
We will now take our next question from Tom Burlison from Bank of America. Your line is open. Please go ahead.
Hi there. Thanks for taking my questions. I had two questions, please. The first is on the paper division, and on prices specifically, where it looks like your realized prices were actually up year-on-year, and a competitor of yours obviously mentioned that fine and publication price had been down between 3%-4% in the quarter. I was just wondering why, we've seen FOEX and list prices trend down. I was wondering why there was that discrepancy, and whether you think that perhaps the FOEX list price is not an accurate reflection of what your realized prices will be going forwards, and also, how pricing is shaping up for Q4, for example.
If you can take the first part. I look on paper prices into the next quarter. I see them to be fairly stable. When I look upon the demand, it's probably going to be slightly weaker, versus the same period a year ago. It's also a period which is a lot of things is undecided yet for the remaining months of this year. When we've gone through prices and demands in the paper, we can clearly see that it's been fairly stable, and that you see in the result. So has the demand. We have been having a very good operational performance in the quarter.
I think it's just confirming what Kalle said, that fine paper prices, they are expected to be somewhat lower compared to Q3, especially in wood free uncoated.
Yes.
Publication paper grades expected that they are more stable compared to Q3. Quite, no drama.
Okay. Thank you. The other question was just relating to your guidance, if you could perhaps give a bit more sort of flesh around that, exactly what you mean by in line to somewhat low. What sort of corridor that implies. Is it sort of flat to minus five or minus 10 plus five? Then just relating to that also, what should we use as the base for that? Is it the 219 EBIT? Because you pointed out, obviously, you had the EUR 7 million gain from asset disposals. Or should we be thinking about EUR 212 as the base?
First of all, you have to remember, if you look at the EBIT guidance, that we are in the ramp-up phase of Beihai Mill, also Varkaus is still ramping up. That's why we want to be careful. It's anchored to Q3 EUR 219 million EBIT level. Like always, we guide based on the previous quarter. The range is from +10% to -25% based on our way to guide. So in line with or somewhat lower than Q3.
Okay. Perfect. It's very clear. Thank you.
We will now take our next question from Linus Larsson from SEB. Your line is open. Please go ahead.
Thank you, and good day to everyone. Coming back to the Beihai project, in the past we've talked about a potential phase two involving a chemical pulp plant. Could you update us around your thought process around a potential pulp mill, at least against the backdrop of lower pulp prices in the market?
We have no board decision on it. If I remember right, I said in Q1 of this year that we need to ramp up the Beihai first. In general, it's basically two years out from when we publish quarter one, until we actually will start to think about and preparing this for the board, if we will prepare it.
Great. That's clear. On Varkaus and the ramp-up of the kraftliner machine, it seems it's delayed. You say that you expect full production in the second half of 2017, rather than the first half of 2017. Could you talk a bit about what is happening and what you are doing to improve the situation?
First of all, we made, as we said, EBITDA break even in the third quarter. In the fourth quarter, we are having maintenance, because now it's been up for a year. In the first quarter, we actually are having additional CapEx put in a small section, which means that we're going to take it down to actually be able to do improved products as well as slightly different products. That means that we will have it down. Unfortunately, because of lead times, we could not combine that with the maintenance shutdown that you need to do after a year.
And so-
Which means that it is really running full in the second quarter 2017.
What kind of products are you planning to make that you haven't been planning to make so far?
It has to be certain qualities that we need to fix, and we need to upgrade some of the hardware.
Okay. All right. Thank you.
We start running it full, but full in the second half. The ramp-up starts in Q2 2017.
Sure.
We will now take our next question from Oskar Lindström from Danske Bank. Your line is open. Please go ahead.
Yes. Good day, gentlemen. A couple of questions. If I just could start off with the liquid packaging board market. Other than your own investment and the potential capacity addition of BillerudKorsnäs, have there been any other major significant changes to capacity in the global liquid packaging board market? Do you know of any planned major changes?
Of the announcements that I'm aware of is this feasibility study that is ongoing in BillerudKorsnäs. That's the only one I'm aware of.
Right. Thanks. My second question is also on liquid packaging board. How much capacity, if any, of liquid packaging board do you expect or production rather, sorry, do you expect to move from Skoghall to Beihai in 2017 and 2018 respectively?
Probably a bit in 2019 as well. Today, we are selling these kind of products from both Imatra and Skoghall. That's over 100,000 tons.
That you would be moving from Imatra and Skoghall to Beihai?
Eventually, yes.
All right. Already by 2017, some of that 100,000.
Not all of it. It probably could stay some of it for special grades and special packaging solution would continue, the bulk will be moved during 2017, 2018, and 2019.
Like we have said, it takes year and a half to two years to qualify liquid packaging board volumes.
Yes. All right. That's actually my final question. As you said, it's a year and a half, two years for the Beihai ramp-up, starting from May 2016. Is that also when you expect to sort of reach, how can I say, run rate in terms of cost and quality? Is that even further out?
That's going to continue for a while. When we have ramped it up and got it qualified, we start to get the profitability towards the right level.
We have not commented yet when we expect break-even or full volumes from Beihai because it's still early stages of the ramp-up. We will come back to that subject in due course. By the way, there is a lot of background noise. I don't know where it's coming from, if you can mute if you are not talking.
Thank you. I realize it's early days, I appreciate your answers on these questions.
We've been running it four months.
Yeah.
Even though it's been in our agenda for many years, but it's four months now since we started it up.
Thank you.
We will now take our next question from Mikko Ervasti from DNB Markets.
Yes, hello. Good afternoon. A couple of questions, if I may. First on the Consumer Board side. On folding boxboard, you commented mainly on the demand, if I got that right, but there's plenty of these supply additions coming in quite a short-term. Any comments regarding your European capacities, Swedish and Finnish capacities? Where would you be? How would you prepare for these major additions? What will you do in this situation? On the Biomaterials, you said that this 15%, the ROCE holds and it's long-term, probably not downgrading that at the CMD. Can you please give some comments about the, if you have some kind of a positive pulp price expectation now for the shorter medium-term?
In general, given the new major capacity additions that are coming online, what kind of pricing dynamics you see in the chemical pulp market in these short, medium, and long-term scenarios? Thank you.
Just to be very clear, we are a very niche player in folding boxboard because food service board, CKB and liquid, these are the main grades. Where we are strong in folding boxboard is either through the area of Performa Brilliance, which is a FBB, which is going after the SBS market with a superb quality. That's basically what we're doing. The other area where we are quite is in the Ingerois grades, Tambrite, which is also very specialized. We are also having an SBS, which is coming out of the Skoghall. We are not really competing with this average folding boxboard quantities. We are very niched in our folding boxboard. We are big in liquid, CKB, and food service board.
Thanks. Yeah. On pulp?
Yeah. On the pulp, if I look on pulp prices, if we look sequentially now from third quarter to the fourth quarter, softwood pulp in Europe slightly lower, hardwood and fluff stable. In China, we think softwood pulp stable, hardwood pulp slightly higher, and dissolving pulp slightly higher. That is the prices. If you look on the demand, compare that to a year ago, Europe, softwood pulp stable, hardwood pulp stable, fluff pulp slightly stronger. In China, softwood pulp stronger, hardwood pulp stronger, dissolving pulp stronger.
Yeah, regarding the balances going forward because a lot of additions there as well. How would you comment on the short to medium term?
There is coming additions, but it is also disappearing quite a number of pulp mills, especially in China. It is probably being added somewhere around 1.5 million per year of capacity. The problem is if it is coming too much in a very short period, then you got volatility. We expect that the pulp market continues to grow. It has been doing also already for some time, a bit over 2%-2.5% a year, which is equal to about 1.5 million tons, sort of one new pulp mill a year. There is no change in the trend. Of course, when you get a bigger volume at one go to the market can cause short-term disturbances, but in longer term, we still believe that it will be moving the right direction.
Okay. Thank you very much.
As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question from Lars Kjellberg from Credit Suisse. Your line is open. Please go ahead.
Just a follow-up. You have, of course, talked about medium-term CapEx around the depreciation mark plus EUR 100. Can you give any guidance how you think about 2017 at this moment, or is that too early?
We have not given any guidance for 2017 yet. We will come back to that topic later. Like we have said, Kalle, I think, mentioned early in the call that we are foreseeing that capital expenditure levels are coming down to a level of depreciation plus about EUR 100 million for biological assets. So that would be, say EUR 500, EUR 550 plus EUR 100, roughly. About EUR 200 million, EUR 250 million of that is maintenance CapEx and then remaining for development and growth projects.
Finally, in terms of working capital, you've done well there, of course, right? How much further runway do you have on working capital?
I think what we have said earlier, and that is still valid, that we are sort of targeting about 10% of net sales as a level, which means that about EUR 100 million or so more that we could knock out.
Very good. Thank you.
There are no further questions in the queue at this time.
Okay. Thank you. It's Ulla here again. I just want to remind everybody that we are hosting a Capital Markets Day in London on 17th of November, and there we have an opportunity to discuss in more detail about the pulp markets because we have our divisional head, Juan Bueno, presenting there, and also the head of Wood Products will be highlighted during the day. Kalle and Seppo will give their presentation, and in the end, we will have a breakout session. Hope to see you all there and get more insight to Stora Enso. Please, Kalle, the word is yours.
Thank you. This was another solid quarter of performance. I'm very pleased that the underlying profitability is going from strength to strength. I'm very happy with the strengthening of the balance sheet. I'm extremely proud of the team in China ramping up Beihai mill now after four months, well ahead of our plan. I wish to see you all on the Capital Markets Day. Thank you very much from Stora Enso. Thank you.
Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.